South Africa Downgraded by Fitch as Strikes Hurt Growth

Jan. 11 (Bloomberg) -- South Africa’s credit rating was cut
to the second-lowest investment grade by Fitch Ratings because
of slowing economic growth, a widening budget deficit and rising
joblessness.

The rating was lowered to BBB from BBB+, while the outlook
was raised to stable from negative, Fitch said in a statement
from London yesterday. That followed downgrades by Standard &
Poor’s and Moody’s Investors Service last year.

“Social and political tensions have increased as subdued
growth, coupled with rising corruption and worsening government
effectiveness, have constrained the government’s ability to
improve living standards, reduce the 25.5 percent unemployment
rate and redress historical inequalities as rapidly as the
population demands,” Ed Parker, a managing director at Fitch,
said in the statement.

The continent’s largest economy probably expanded at the
slowest pace since a 2009 recession last year, limiting the
government’s ability to meet budget-deficit targets and its room
to stimulate growth and create jobs. The worst mining violence
since the end of apartheid in 1994 shut platinum and gold mines
last year, lowering South Africa’s growth rate by about 0.5
percentage point, according to the National Treasury.

“There has been a significant deterioration in South
Africa’s credit worthiness,” Razia Khan, head of Africa
economic research at Standard Chartered Plc in London, said in a
phone interview yesterday. Fitch’s case “is much more
substantive than speculative” about future events.

Slower Growth

The government is forecasting growth of 3 percent this
year, compared with 2.5 percent in 2012. The budget gap is set
to widen to 4.8 percent of gross domestic product in the 12
months through March from 4.5 percent a year earlier, Finance
Minister Pravin Gordhan said in October.

S&P cut the nation’s assessment by one level to BBB on Oct.
12 and Moody’s lowered it on Sept. 27 by the same magnitude to
Baa1. Both retained a negative outlook.

Slower economic growth is due in part to the recession in
euro-area nations, crimping demand for manufactured exports, the
Treasury said in an e-mailed statement after Fitch’s decision.
The ruling African National Congress’ adoption of the 20-year
National Development Plan at its conference last month will help
ease poverty, create jobs and build infrastructure, it said.

The ANC re-elected Jacob Zuma as president, chose
businessman Cyril Ramaphosa as his deputy and rejected calls to
nationalize mining assets at the meeting.

Risk Premium

“The conference resolutions give certainty on economic
policy, which the Fitch report does not seem to fully
appreciate,” the Treasury said. The government’s budget shows
an “unambiguous commitment to maintaining debt and expenditure
growth within sustainable levels. These principles will continue
to underpin South Africa’s fiscal stance.”

South Africa’s risk premium has dropped since the ANC
conference, even as the Fitch downgrade loomed. The extra yield
on the nation’s bonds due March 2021 over similar-maturity U.S.
Treasuries narrowed 37 basis points since Dec. 15, a day before
the ANC conference began, to 440 yesterday, the narrowest since
December 2007, according to data compiled by Bloomberg.

Moody’s and S&P both cited the jobless rate as creating
pressure on the government to boost social spending, limiting
its ability to meet budget gap targets. Violent strikes at mines
that began in August at Lonmin Plc.’s Marikana platinum shaft,
which left more than 46 people dead, has also undermined the
growth outlook.

‘Move Justified’

“We would agree with Fitch and see the move as
justified,” Peter Attard Montalto, a London-based analyst at
Nomura International Plc, said in an e-mailed note to clients.
“Indeed, we worry that in our baseline many of the negative
rating sensitivities that Fitch highlights come true –- in
particular that there is a failure to generate faster employment
growth, structural reforms remain slow and so there is little
improvement in competitiveness.”

The rand extended its decline after the rating was cut,
dropping as much as 1.1 percent to 8.6858 per dollar in
Johannesburg yesterday. It was trading 0.4 percent weaker at
8.6849 against the dollar as of 7:28 a.m.